Starbucks Takes Mumbai

Is the coffee behemoth too late to India's cafe party?

During a recent Friday lunch hour, the line at Mumbai's first Starbucks nearly spilled out the door. Yet the promise of a long wait didn't deter anyone. The Seattle-based company's first Indian outlet was already six years behind schedule. The 30 or so businessmen, students, and sari-clad women patiently queuing were just happy to finally try a Frappuccino.

Not your cookie-cutter Starbucks.

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Other than its massive size—it's housed in an elegant colonial-era mansion—Tata Starbucks, as the Indian venture is known, proffers its parent brand's staple look. Towers of ceramic mugs and other items for sale are neatly stacked near the register. Coffee-bean bags and portraits of smiling Indians holding Starbucks cups decorate the walls. Employees in green hats and aprons scribble drink orders onto paper or plastic cups at the register. While the customer pays, those cups are transferred to a separate coffee bar, where baristas make sense of the shorthand behind gleaming espresso machines.

At first glance, the new shop appears even better than the American version. Drinks are cheaper, and the pastry case offers more than sandwiches and muffins. Alongside chicken tikka panini and cheesecakes, a tempting spread of tandoori paneer rolls and cardamom croissants appeals to India's predilection for vegetarian foods with spice. But a closer look reveals a few cracks—perhaps just growing pains as the 2-month-old store struggles to find its footing. The baristas, frantically blending and pouring Indian-grown espresso, appear overwhelmed by the endless arrival of new cups at the bar. The employee charged with ferrying new orders between the bar and the register drops an entire tray of empty cups onto the floor—but instead of rewriting those orders on clean cups, he hastily arranges them on the edge of the bar. Adding to the confusion is that by the time customers make it through both queues, which today is taking about 45 minutes, many lose their patience.

Naysayers claim the coffee goliath has arrived too late: In the six years it has taken Schultz and co. to break into one of the world's fastest-growing coffee markets, some 2,500 other cafes have set up shop around the country. (With more than 1,300 outlets and counting, India's Café Coffee Day will be Tata Starbucks' largest competitor.) But other experts predict India's $230 million coffee market has plenty of room for new players.

"Given the size of this country, India could stand another 7,000 cafes," says Arvind Singhal, chairman of Technopak Advisors, a consultancy based in the city of Gurgaon that advises companies hoping to enter India's booming food and retail sectors. Singhal believes there is plenty of opportunity for Tata Starbucks here, particularly if the young franchise can provide a consistent level of quality product and service—something competitors haven't done in the past. "In some [Café Coffee Day] outlets, you will get outstanding products and outstanding service, and in some other outlets you will get absolutely terrible products and terrible service. So consistency of products and consistency of service is something which, for a player like Starbucks, which has global experience managing tens of thousands of locations, could be their competitive advantage."

Success also depends on how wisely Tata Starbucks chooses its new locations. In India, the franchise shouldn't rule out the outsourcing hubs around Bangalore, Delhi, and Mumbai when considering new locations, says Singhal, calling those areas "small townships" with thousands of employees packed onto a single campus. "If they [Tata Starbucks] limit themselves to the more sanitized locations like hotels or malls, they will do well," Singhal explains. "But they will also be sub-optimizing the potential in India."

Regardless of Tata Starbucks' growth strategy, the daily challenge of working in India remains. Painful evidence of the nation's crumbling infrastructure came in a two-day collapse of its electrical grid this summer that left hundreds of millions without power. Trickiest of all might be navigating India's labyrinth of red tape and corruption, which seems to taint the reputation of any foreign brand that dares to do business here. Last year, UK-based drink-maker Diageo paid $16 million to settle a bribery case. Most recently, Walmart's Gurgaon-based franchise came under investigation for bribery. It was also revealed that the American company dumped $100 million into a puppet consultancy that, according to Reuters, lacked both employees and profits.

Singhal hopes the recent scandals will refocus the debate on how to simplify the process of doing business in India—critical to which is allowing less room for bureaucrats to demand bribes. "Nobody in India wants to give a bribe to do a legitimate business," says Singhal. "If Walmart or anybody wants to conduct a business legitimately in India, why should they have to pay a bribe to some inspector?"

But India's flourishing consumer class rewards those who have the patience to do business here. "On the positive side, the story in India is very good," says Singhal. "Consumers are very optimistic about spending, and they're spending on a wider range of products and services." In many parts of the world, he says, retailers find cash-strapped consumers less willing to splurge on their products. "In India, consumer spending is a challenge that is not being faced yet," Singhal explains. Despite the global downturn, India's economy still grows, on average, 5 percent each year. Even a slice of that pie has the potential to prop up sluggish sales elsewhere—particularly in Europe, where Starbucks continues to shutter underperforming stores.

Similarly, executives at Tata Starbucks remain hopeful. "India is one of the most exciting markets in the world, with a very diverse and dynamic culture," says Avani Saglani Davda, CEO of Tata Starbucks Limited, in an e-mail. "The size of the Indian economy, the growth of cafe culture, and the rising spending power hold strong potential for our growth here." Since opening its flagship store in Mumbai on October 19, Tata Starbucks has opened two additional outlets in the city.

Somewhat ironically, the "Starbucks- ization" of India is something Café Coffee Day has so far managed better than Schultz. "They are in tourist destinations, office complexes, gas stations," Singhal says of the pervasive brand, which opens an average of one new store per day, as Starbucks did in its '90s heyday. "Café Coffee Day is almost everywhere where people are, and there are lots of people in India."

But slowing down Starbucks' typical rate of expansion to "crack the code" (as Schultz has described entering the Indian market to other press) may serve the company well in the long term. "It has taken them [Starbucks] a while, but at the end of the day, I think they've found a very good partner," Singhal says of the Seattle-based brewer. Not only is Tata Global Beverages India's largest coffee producer; the Indian conglomerate also brings a vast network of hotels and realty from other business holdings, along with a reputation of "absolute cleanliness."

But Mumbaikars may care less about the brand than about finding a new place to hang out. "Initially it's not so much a question of Café Coffee Day versus Starbucks," says Singhal. "India is very short of good locations where people can sit down for a cup of tea or coffee, to just meet casually. It's more about just finding a good coffee shop next to your house or next to where you are."